Resources bosses warn against revenue slug

Leading chief executives warn that uncertainty about the impacts of the Henry tax review could delay investment in the fast-growing coal-seam gas ­industry, threatening Australia’s long-term positioning as a prime destination for resources projects.

The review is expected to recommend that federal taxes now levied at 40 per cent on certain offshore petroleum projects are applied to all onshore mining and resources projects, including the emerging coal-seam gas projects in Queensland and NSW, which are currently covered by state royalty regimes.

Proponents of the coal-seam gas to liquefied natural gas developments have been scrambling to lock in supply deals with customers in the growing Asian energy markets, which are necessary to underpin the multi-billion dollar projects.

Santos
chief executive
David Knox
urged the government to “maintain the current fiscal situation" to protect the massive capital investments needed.

“At a time when companies like ours and several others are considering very large developments, my caution would be that now is not a good time to be changing the fiscal regime," Knox told The Australian Financial Review.

“We rely on a stable fiscal setup in order to make these massive investment decisions. Any change in fiscal regime would require a huge amount of studying and have the risk of delaying potential investment decisions."

Companies such as Santos have aggressively pursued expectations that coal-seam-gas-to-LNG projects will allow them to tap Asia-led demand for energy. In Queensland, several multi-billion dollar coal seam gas LNG projects are being considered.

While optimism about the sector has surged after the signing of recent LNG export deals worth tens of billions of dollars each, project proponents are competing with projects around the world for limited resources to finance and construct LNG terminals.

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Origin Energy
chief executive
Grant King
says he feared that a tax slug could undermine projects.

“We’re concerned to the obvious extent that any proposed change creates uncertainty, and at a time when we and others are trying to make large investment decisions that uncertainty obviously goes to returns. Hence our concern," King says.

It is widely expected that the tax review chaired by federal Treasury secretary Ken Henry proposes replacing a plethora of inconsistent state royalty regimes with a 40 per cent resources rent tax on mining and energy projects, modelled on the resources rent tax currently imposed on crude oil and natural gas in federal waters.

While such a system only taxes projects turning a profit and is thus designed to recognise the risks of investment in exploration and infrastructure, there has been growing concern within the resources sector that it faces a “tax grab".

Over the weekend, federal Treasurer Wayne Swan was playing down suggestions the government would hit mining companies with a resources rent tax on top of state royalties that already reap about $7 billion.

The government is releasing the Henry report and the government’s response on Sunday. But Swan says he will not speculate on the contents of the review and cautioned against “hysterical short-term reactions" to speculation.

Nevertheless, concerns about the shift to a national resources rent tax in the Henry review have sparked debate across the energy resources sector. Australian Worldwide Exploration managing director Bruce Wood says projects will be less likely to proceed if there is a higher tax take.

“I don’t think we need to beat around the bush, any increase in tax or government take, which is what they’re talking about, onshore will affect where projects go," Wood says.

King agrees the issue is “not a philosophical discussion" about the merits of resources rent taxes compared to royalties.

His concern is that the resources sector will bear a heavier load of the tax burden.

“That’s the real concern, that there’s maybe this primary agenda to change the tax burden. And my view there’s been enough to indicate that’s been the agenda. And that’d be of great concern to us," King says.

Miners warn that a significant contributor to the nation’s wealth could be discouraged by a higher tax take.

“It’s a very powerful disincentive not to enter the industry," says one of the highest-profile players in Australia’s mining industry, former Oxiana chief executive
Owen Hegarty
.

“We’ve got to encourage all that. We need to increase our mineral inventory. Encourage it, nurture it, help it grow at all levels, at the junior level. Don’t give it a disincentive or it will become just another also-ran."

Felix Resources
managing director
Brian Flannery
says the industry needs to see the detail in the report and he hopes the tax review “doesn’t kill the goose that laid the egg".

“The only way we are going to pay for the stimulus package is to continue to have a robust resource industry," Flannery says.

Silver Lake
managing director
Les Davis
said that a higher tax take could lead to spending cuts elsewhere.

“Whether that be a job or a drill-hole, or a piece of mine development, something will suffer," Davis says.

There are also fears the recent recovery in minerals exploration spending across Australia could be undermined by a higher tax impost.

Juniors, which traditionally conduct a significant proportion of the country’s exploration for new deposits, are already struggling to tap markets for cash injections.

“I think it’s right that the smaller guys will be hurt the most. I think we’re only just beginning to realise the potential impact that this can have on producers," says
Western Areas
chief executive
Julian Hanna
. The tax review already promises to be significant for the resources sector, which has been concerned about the lack of a flow-through shares program promised by Labor during the 2007 election campaign.

Investor confidence had already been damaged by reports about the expected overhaul of resources taxes in the Henry review, the industry says.

This is a particular concern for cash-strapped emerging mining companies already struggling to secure capital, according to Association of Mining and Exploration Companies chief executive Simon Bennison.

“It’s the uncertainty, it adds to it," Bennison says. “You don’t need a lot of uncertainty to turn around to your board and say, ‘If we have to make a decision now, let’s go offshore because we know there’s certainty offshore, we know what our cost structure is going to be, and we’ll come back to Australia when the governments have sorted themselves out and we know what’s happening.’ ’’

However, Bennison acknowledges that because the existing federal petroleum resource rent tax only applies when a firm has earned above natural or “super" profits, this might benefit the juniors.

“That is an option. And we say to the states that they could look at doing that at a state level. Some do."

This was echoed by
Atlas Iron
chief financial officer
Mark Hancock
, who says there could be advantages in being taxed “when your project is able to bear it better".

“It might mean that the time you’re looking to get your project up and running you’re in a sort of royalty holiday by virtue of capital recoveries and later in the project when you have basically been reimbursed that capital and you have got more free cash, your liability comes at that point in time," Hancock says.